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India Business Report : Follow bottoms-up approach in volatile times

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Only about 20 days ago, equities across the world fell badly - on October 15, S&P500 fell 6-month low; the European stocks fell the most in 3 years and declined 11% from June high. In mid-October, the fear in equities got intensified following the downgrade of global growth by the IMF. However, the equities across the world rallied last week - S&P500 and Dow Jones Industrial Average hit all-time highs. S&P500 moved up 2.7% last week and cumulatively rose 8.4% since October low; The Stoxx Europe 600 rose 2.9% and closed at 4-week high; Japan's Topix rose 7.4% and even Brazil, which is suffering from recession, saw its benchmark index rising by 5.2% last week.

The global equities rallied despite the US Fed announcing last week the end of bond buying programme and China's PMI slowing down in October due to property slump and slowdown in
investments.

On the global front, in the last twenty days only two major positive developments have happened. The US companies continued to post better profit growth, more than the street expectations - 363 companies in S&P500 posted 10% yoy profit growth for September quarter.

Secondly, the Bank of Japan unexpectedly increased the annual target for monetary expansion to 80 trillion yen ($724 billion) from as much as 70 trillion yen. However, before these two developments unfolded, the global equities already recovered a major part of their losses since October 15.

In tandem with the global equities, domestic equity market hit fresh record highs last Friday. Both the Sensex and Nifty gained 4% for the week ended October 31 over the last week's close of 24,787 and 7,996 respectively. On the domestic front, the growth in 8 core sectors slowed to 1.9% in September and the Union Government's fiscal deficit for the first half of current fiscal has hit 83% of full year target.

September quarterly results announced so far also didn't show any significant growth over the last September quarter. With this background, many investors are unable to understand such sweeping changes in the direction of equity markets.

Falling inflation, continued focus of the government in accelerating investments, anticipated improvement in the economic growth rate, stimulus packages from Japan and Europe, recent moderation in commodity prices, expected improvement in corporate earnings in the second half of current fiscal, etc., do provide optimism on the continuation of structural bull run in the domestic equity markets.

However, the global equities, including the Indian equities, would continue to witness significant volatility till end of the current fiscal. Strong signs of reversal of interest rate cycle in the US and any fall in the Chinese GDP growth rate even by 20 bps would once again trigger significant short-term volatility in the markets. To manage the anticipated volatility in this domestic equity market, which is at lifetime high, it is better for the investors to follow "bottom-up approach" with strong fundamentals and reasonable valuations.

It would be wise to avoid investing in companies, which enjoy a marketcap of close to Rs 1,000 crore while annual turnover being just Rs 10 crore; or in companies which have created a market cap of over Rs.1,000 crore with a tiny investment of Rs.30 to Rs.40 lakhs in the fixed assets.

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